Manulife Financial delays $4B profit target by a year on 'headwinds'

11/08/2012 05:09 EST
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Updated
01/08/2013 05:12 EST

CP

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TORONTO - Manulife Financial Corp. (TSX:MFC) has pushed out its target date to reach $4 billion in profits by a year and has also changed how it calculates its earnings as the insurer continues to face market challenges.

The Toronto-based insurer, whose third-quarter results tumbled deep into the red, said "significant headwinds" it faced over the past two years have made it difficult to achieve its target of reaching $4 billion in earnings by 2015.

The company now plans to target $4 billion in "core" earnings by 2016 instead, saying the revised metric, which is not a standard measure under international financial standards, better measures the company's "underlying profitability."

The new measure removes mark-to-market accounting volatility as well as items it determined "exceptional" from its earnings. Mark-to-market accounting compels companies to value assets and liabilities at their current worth, even though they might not be drawn upon for years down the road.

"We think investors are most interested in core earnings because it gives you some sense of the earnings capacity of the organization," Donald Guloien, president and chief executive officer explained on a conference call with analysts to discuss third-quarter earnings.

"When we had the last set of targets I think it was actually slightly vague whether we were talking about net income or core earnings."

Insurers have long complained about mark-to-market measures because their investments are sensitive to fluctuations in interest rates and equity markets, both of which have been troublesome in the years since the recession.

The Canadian insurance giants have blamed challenging equity markets and interest rates, which have been hitting insurers who invest much of the money they make from policyholders.

Falling stocks and bond yields — battered by fears of a slowing global economy — reduce projected future returns on investment portfolios, which are used to guarantee future policy payouts.

In Manulife's most recent quarter, accounting items totalling $1.2 billion helped push the company into a $227 million net loss or 14 cents per share, using standard accounting.

However, a year earlier, Manulife's net loss was even bigger — $1.277 billion or 73 cents per share.

But using the new core earnings standard, its third-quarter results jump to a profit of $556 million, or 29 cents per share, from $624 million or 34 cents per share a year earlier.

Still, that fell short of analysts' expectations for an adjusted profit of 32 cents per share, according to Thomson Reuters.

The quarter included a $1-billion accounted charge related to Manulife's annual review of actuarial provisions due to the current macroeconomic climate.

The Toronto-based company also recorded a $200-million write-off of goodwill, a type of intangible asset that reflects the long-term value of acquired businesses.

Manulife said those negatives were partially offset by a $413 million favourable item from its investment activity.

Guloien said the company has now achieved its equity and interest rate hedging targets two years ahead of its 2014 goals, moves made to further reduce the volatility of its earnings.

The company is seeing some noticeable improvements as a result. For instance, the loss booked on direct impact of equity markets and interest rates fell to $88 million from $889 million in the third quarter of 2011.

During the quarter the company saw an eight per cent decline in insurance sales, largely due to a one-time event in the prior year quarter, but it also saw four per cent growth in wealth sales.

Looking ahead, the company said it has minimal exposure to insured losses incurred in the U.S. as a result of the so-called superstorm Sandy and expects it will not materially affect its fourth-quarter results.

Also on Thursday, rival Sun Life Financial (TSX:SLF) said its own targets remain "suitably ambitious" even as the insurer reported sharply improved third-quarter results compared with a year ago.

At the company's investor day in March, Sun Life set a target for 2015 of $2 billion in operating profits and operating return on equity of 12 per cent to 13 per cent.

The company reported a profit of $383 million or 64 cents per share for its latest quarter compared with a loss of $621 million or $1.07 per share a year ago.

Meanwhile, Great-West Lifeco Inc. (TSX:GWO) says its third-quarter earnings grew 14 per cent as sales picked up across most of its segments, including insurance and investment products.

The Winnipeg-based insurer says profits attributable to shareholders grew to $520 million, or 55 cents per share, compared with $457 million, or 48 cents per share, in the same period of 2011.

On Thursday, shares in Manulife fell 18 cents to $11.82, while Sun Life shares bounced 94 cents to $25.31 and Great West Life shares added nine cents to $22.91.